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Why do people set up SMSFs?

I would like to understand why lots of people have set up their own self-managed super fund. What are the pros and cons?

Many people don’t like paying the fees to super fund managers and so they decide to do it themselves. I know some experts say you can make a self-managed fund work with even as little as $50,000 but I reckon you would want about $200,000. You see, if your accounting bill, other related fees and brokers charges for buying shares add up to $2000, that’s a one per cent cost for doing a SMSF. Costs per year will average around $1000 to $1500.

Industry funds can be cheaper than that and could be a better option. Some people want to be their own fund manager which means they select the way they allocate their money between shares, interest-bearing securities, property and even things such as art. Some people want to hold a bigger share of their wealth in unusual assets such as art, collectibles and even wine but it’s likely the new Gillard Government will establish more restrictive storage rules for these kinds of assets.

The control of your investment is an appeal factor but you have to be diligent and be willing to do your homework.

The Australian Taxation Office’s website (link) is a good start for anyone wanting to get into a SMSF as they regulate these funds.

You will need to go to an accountant or adviser to create a trust which underlies your SMSF. Next you obtain a tax file number and an Australian Business Number. Then you write down your investment strategy and open a bank account for the fund.

Accountants are good for the establishment stuff but can’t give financial advice unless they are also financial planners. The deed outlines who the members are. Four is the maximum and they are appointed trustees. They must be over 18 and can be a trustee if they are not undischarged bankrupts or have not been convicted for an offence related to dishonesty. Each trustee has to be across what the fund does.

The tasks involved with a fund include filing an annual tax return, lodging member contributions statements and appointing an approved auditor to complete the annual audit.

You need to decide to be regulated by the Superannuation Industry (Supervision) Act (SISA) to get the concessional tax treatment. Your accountant will generally do this legwork.

You can get an accountant and along with a financial adviser get the whole thing set up and you can devise your investment strategy or create it with an adviser.

With your strategy you could, for example, state that you have a high-risk profile and you intend to be fully invested in shares. On the other hand, you could be very conservative with only 30 per cent exposed to shares and 70 per cent in fixed interest securities. For someone who loves investing and is comfortable with paperwork and being organised, a SMSF can be a good idea. Given a SMSF is taxed at 15 per cent and company tax is 30 per cent, many investors always buy fully franked dividend stocks so they pick up tax credits which reduces the tax on the SMSF. I have seen some funds actually get tax refunds or have no tax to pay.

By the way, if you make mistakes in running your SMSF your fund could be denied its tax concessions and you could end up with a big tax bill! If you decide to do it, do it professionally. 

Have questions about your super? Find the answer.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, October 15, 2010

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